The Next Housing Bubble

Sales and prices of homes jumped in 2012—a sign that the housing market is recovering. Not really. As it turns out, hundreds of thousands of foreclosed single-family homes are being scooped up by hedge funds and big banks—yes, the same folks who led us to a housing crash in the first place. From The New Republic:

If you’ve signed a lease in the past year, there’s a good chance your landlord wears a tailored suit and works on Wall Street. One of the hottest trends in the financial sector is known as “REO-to-rental.” Over the past couple years, hedge funds, private equity firms and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, often in bulk, at bargain prices. Their strategy is to convert them to rental units for a while before reselling them when prices appreciate. The Wall Street firms are scooping up properties in the hardest-hit areas, promising high returns for the rental revenue streams—up to 10 percent annually—and starting bidding wars that have driven up some prices well above national averages. It’s the next Wall Street gold rush, with all the warning signs of a renewed speculative bubble.

There’s a lot of downsides to this: Some of the current gains in the housing market that are occurring right now are artificial. People who want to buy homes are finding themselves being outbid by investors with deep pockets. Even Warren Buffett, the second richest man in America, told CNBC-TV last year that if he could do it easily, he’d buy up “a couple hundred thousand” single-family homes because he believes the yield on rental investments are a good bet. Rents have been steadily rising nationwide as home prices in hard-hit areas continue to slide. And then there’s this: “…Wall Street has begun to explore the option of securitizing the rental revenue, much in the way that they used mortgage-backed securities to ramp up capital in the bubble years.” It looks like the banks have short-term memories.

Photo: faul

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15 Comments / Post A Comment

EvanDeSimone (#2,101)

You have to admit there’s a certain type of brilliance to this. Of course it’ll all end the same way.

AitchBee (#3,001)

@EvanDeSimone With THE REVOLUTION???

dotcommie (#662)

i don’t think you’re fully considering all angles of this. some areas are recovering, sure, but there definitely aren’t bidding wars in areas hit hardest by foreclosures. people’s credit is damaged at the same time banks are becoming extremely conservative in their lending standards, so the alternative to investors buying up single family homes and renting them to families is a bunch of vacant, potentially blighted single family homes. we need policies to make sure the investors are behaving as responsible landlords, but if this is done right, it can help a lot of places until homeownership picks up again (and it won’t, not for awhile). investor isn’t automatically a dirty word, though i understand why people are wary. and, theoretically this will help with rental affordability. rents are rising because homeownership is becoming increasingly inaccessible and the supply of rental housing isn’t rising to meet the growing demand. having more rental units on the market should help with that shortage.

r&rkd (#1,657)

@dotcommie
Yes. I invite interested landlords to buy, rehab, and rent out one of the six empty buildings on my block. I would prefer almost any neighbors to these empty buildings.

Sallymander (#3,159)

This is going on like crazy in DC, going hand-in-hand with the push to gentrify. That article posted here a few days ago hit the nail on the head when it pointed out that real estate developers are an often-overlooked actor in urban gentrification, rustling up business and rent so that the properties they picked up for cheap start turning insane profits.

r&rkd (#1,657)

@Sallymander
Who are the not-often-overlooked actors? I suppose there’s the usual goofy “blame white artists” line, but otherwise, who are you thinking of?

Sallymander (#3,159)

@r&rkd Well, I often see it being portrayed as kind of an organic, non-deliberate process, you know? Like, places change demographically over time all by themselves and such. While that’s certainly true, the rapid gentrification of up-and-coming urban areas is something else altogether.

r&rkd (#1,657)

@Sallymander
Okay, so you’re saying it’s a deliberate process. Who are the actors who are acting deliberately? Don’t be afraid to name names!

deepomega (#22)

The only victims are first time homebuyers, and what could people between the ages of 20 and 35 have to complain about economically speaking??

Sallymander (#3,159)

@deepomega If you can afford to buy at 20-35 you’re sitting pretty!

blueblazes (#1,798)

@deepomega I am in both of those categories. Where I live, at least, the “starter home” as a concept is almost dead. Smallish, oldish houses don’t find their way onto the market at a discount. Prices remain strong because of the aggressive rents that investors can demand whether they fix these houses up or not. With rents rising, what happens when I get priced out of both renting AND buying? Relocation to a cheaper market outside of my region might work, but that would be predicated on employment opportunities in the new location. (Which, in theory, would be poor. Because the presence of work would necessarily raise the price of housing for all the workers flowing in…right?)

I propose a WPA/New Deal style program that pays workers to move all of those abandoned suburban castles from Las Vegas to my neighborhood. Two birds with one stone, my friends.

MissMushkila (#1,044)

@Sallymander It entirely depends on where you live. In my city and region, a lot of people in their mid-late twenties own homes. Here, it is cheaper to pay mortgage than rent almost invariably – if you have decent credit and a small down payment. Houses are for the most part between 55,000 (small/dodgier areas) to 250,000 (large/wealthy suburbs).

SnarlFurillo (#2,538)

@deepomega Well, first-time homebuyers, plus the former home owners who went into foreclosure and are now renting their own house back from a speculative bank who gobbled up all of their equity. Usually by giving them a shit loan to begin with. Or at least that’s what’s happening out in Oakland.

chic noir (#713)

@MissMushkila 55k is nothing and pretty sweet. Most people can pay that off within a few years.

I’m getting ready to move to a part of the country where there are more houses than apartments (still a big town, but it feels like the country to me!) and there are so many places for rent and I just couldn’t figure out why! This makes a lot of sense. But as someone else said upthread, it may not be all bad since home loans aren’t exactly easy to get right now, and rented is definitely better than empty. But on the other hand that also creates a market for these investors because people who can’t get home loans are obviously going to rent. If the investors in rentals are also the ones giving credit to homebuyers, will credit ever be easier to get? Or will it be made difficult in order to make more people rent and in-turn fund rental-backed securities?

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